Investor Views on Investment and Borrowing

Investor Views on Investment and Borrowing Highlights from the : Highlighted findings Survey conducted: July - August 2014 Report released: November 2014 Reproduction strictly prohibited Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 1 2015 Investment Trends 1

Thank you I would like to thank all the survey respondents who participated in our 2014. Your efforts enable us to produce research reports that provide most large Australian financial services organisations with an opportunity to develop better products and services for investors. This extract of highlighted findings from the report gives investors who participated in the research an opportunity to see some of the results from the survey. I hope you find it interesting. Many Thanks, Mark Johnston Principal Investment Trends Suite 2102, Goldfields House 1 Alfred Street SYDNEY NSW 2000 Australia 2015 Investment Trends 2

Table of contents Methodology & scope 4 Margin lending market 5 Growth dynamics 6 Share market outlook 7 Investor sentiment 8 Risk mitigation measures 9 Barriers to using margin lending 10 Intended use of margin lending 11 Rationale behind intended increase 12 Number of margin calls 13 Margin call resolution 14 About Investment Trends 15 2015 Investment Trends 3

Methodology & scope This report is based on an online survey of 3,244 investors conducted in July and August 2014. Investors were recruited via email invitations sent by: Investment Trends to investors on its opt-in panel Leading margin lenders to clients in their database We received valid responses from 1,875 current margin lending investors, 104 prospective margin lending investors who had not had a margin loan before, 494 dormant investors who had stopped using margin lending in the past but may come back over the next 12 months, and 175 former investors who had stopped using margin lending completely. Maximum sampling error is +/-2.3% for current investors (9 confidence interval, centre of the range). Sampling error will be higher when analysing smaller groups. Where appropriate, respondents were post weighted slightly to remove any sampling bias and ensure correct distribution by provider of most recent margin loan. The report builds on seven prior annual studies of margin lending investors, so extensive tracking information is used to illustrate how the market has evolved over time. 2015 Investment Trends 4

Margin lending market The total margin lending market grew year-on-year for the first time since the GFC, reaching $11.9 billion According to the RBA, there were 70,000 current margin lending clients as of September 2014, down from 78,000 last year. Despite the fall in the number of investors, in dollar terms the margin lending market grew by $679 million to $11.9 billion in the 12 months to September 2014. Growth was achieved because falling investor numbers were offset by larger loan balances. Average loan size rose from $143,000 in September 2013 to $169,000 in September 2014. A significant increase in the usage of margin lending among remaining investors outweighed the impact of the continued fall in the number of current margin lending clients Margin lending market size and dynamics (Source: Money and Credit Statistics, RBA) Total number of clients Average loan size per client ($) Total volume (RHS, $m) 300,000 $60,000 275,000 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 - Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. $50,000 $40,000 $30,000 $20,000 $10,000 2015 Investment Trends 5 $0 4

Growth dynamics Direct investor channel grew the most followed by the broker channel, while the planner channel shrank The breakdown of the growth reveals that most of the growth in the margin lending market was investor driven. In the 12 months to September 2014, the direct investor channel and the full service stockbroker channel of the margin lending market experienced the highest year-on-year growth since the GFC, with total outstanding margin debt increasing by $726 million in the direct investor channel and by $302 million in the broker channel. Total margin debt held through financial planners shrank by $348 million during this period. The broker channel of the margin lending market grew by $302 million to $3.2 billion in the year to September 2014, the direct channel grew by $726 million to $5.1 billion, but the planner channel shrank by $348 million to $3.6 billion Margin debt outstanding by channel (Money and Credit Statistics, RBA) 18,000 Broker Direct Financial planner 16,000 14,000 -$14bn (-80%) Total ($m) 12,000 10,000 8,000 6,000 4,000 2,000 0 Sep-03 Jan-04 May-04 -$6.9bn (-58%) Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 -$8.9bn (-7) Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. May-14 Sep-14 2015 Investment Trends 6 $5.1b $3.6b $3.2b 5

Share market outlook Despite rising markets, investors average return expectations decoupled from the market performance The ALL ORDS index rose to a six year high, improving 19% between June 2013 and June 2014. However, investors' annual capital gain expectations fell despite market performance. Investors were expecting an average annual share market return (excluding dividends) of as of August 2014, whereas they were expecting or higher return a year prior when the market was lower than the current level. Return expectations are a great indicator of what investors are thinking in terms of their short term investment decisions. All Ordinaries Index rose to a six year high in June 2014. Average return expectation has decoupled from the stock market Average return expectation (excluding dividends) vs ALL ORDINARIES Among share traders ALL ORDS Average return exp. of ALL ORDS over the next 12 m. ALL ORDINARIES 7000 6500 6000 5500 5000 4500 4000 3500 13% Oct 09 Dec 09 Feb 10 8% 7% Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 3% 3% 2% Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 3% 3% Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 7% 2013 survey 8% 7% Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 2014 survey Feb 14 Apr 14 Jun 14 Aug 14 1 12% 10% 8% 2% 0% Average return expectation (excluding dividends) 6 2015 Investment Trends 7

Investor sentiment 78% of current margin lending investors are likely to view margin lending as an easy way to borrow to invest With improved market performance, current margin lending investors are likely to view margin lending as an easy way to borrow to invest, with 78% agreeing with this statement. Only 2 think property is a safer bet than shares at the moment. 31% of current margin lending investors perceive Australian shares to be undervalued. While three fourths (78%) of current margin lending investors believe margin lending is an easy way to borrow to invest, the majority (78%) of them still think most investors are unaware of how to use it in bear markets Q7 Do you agree or disagree with the following statements? Among current margin lending investors % who agree: 31% 2 58% 61% 78% 78% 27% 11% 39% 8% 1 20% 7% 13% 20% 1 3% 13% Strongly disagree Somewhat disagree 3 53% 50% Neutral 27% 43% 42% Somewhat agree 28% 3% 19% 1 19% 2 28% Strongly agree Australian shares are currently undervalued Property is a safer bet than shares at the moment People at my age should consider gearing as a way of boosting their retirement savings I would be inclined to borrow (more) for investing if my original investment value was protected Most investors are unaware of how to successfully use margin lending in a bear market Margin lending is an easy way to borrow to invest Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 7 2015 Investment Trends 8

Risk mitigation measures Margin lending investors say they undertake numerous measures to mitigate the risk of margin loans A typical margin lending investor considers 3.5 different measures to mitigate the risk associated with margin loans. The top 5 measures are: Gear conservatively (6) Diversify investments (6) Monitor investments and loan balance frequently (4) Maintain a low loan to value ratio (4) Invest only in blue chip shares (3) Gearing conservatively, diversifying investments, monitoring investments and loan balance frequently, and maintaining a low LVR are widely used measures to manage the risk involved in margin lending Q23 How do you mitigate/manage the risk involved in margin lending? Among current margin lending investors [n=1586] 0% 10% 20% 30% 40% 50% 60% 70% Gear conservatively Diversify investments 6 6 Monitor investments and loan balance frequently Maintain a low loan to value ratio 4 4 Invest only in blue chip shares Reinvest the income from my investments 32% 3 Make regular interest payments 27% Use fixed interest rate loans 13% Invest in managed funds 7% Invest in Exchange Traded Funds Use options Use capital guaranteed investments Other Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 8 2015 Investment Trends 9

Barriers to using margin lending Three quarters of current margin lending investors say risk aversion is a barrier to using margin lending more When asked what holds them back from borrowing more, 62% of current margin lending investors say they are comfortable with their current level of debt. A third (31%) say they prefer keeping a buffer and a quarter (2) say they are becoming more conservative as they get older. Compared to 2013, fewer margin lending investors see volatility and high interest rates as barriers, with only 20% (down 10% pts from 2013) saying interest rates are too high and 1 (down 10% pts) saying recent market volatility is a barrier. More current users are likely to cite risk aversion as a barrier to increasing their use of margin lending Q29 What prevents you from borrowing more money on your existing margin loan? (Multiple responses permitted) Among investors who currently have a margin loan 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Comfortable with current level of debt Prefer to keep a buffer/safety margin I'm becoming more conservative as I get older I'm waiting for the right investment opportunity I'm waiting for a market correction Risk of margin calls Interest rates are too high Already borrowing the maximum Other forms of borrowing are cheaper Can't afford the interest payments Just haven't got around to it Lack of protected/no-margin-call loans Recent market volatility Many of my securities are not on approved list Prefer to use equity in my home instead Prefer to use equity in an inv. property instead Too risky/volatile stock market Too complicated/time consuming Other Nothing 2013 [n=1102] 2014 [n=1565] Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 11 2015 Investment Trends 10

Intended use of margin lending Nearly half of current margin lending users plan to increase their use of margin lending in 2015 Many users, especially those who began borrowing (again) within the last year, plan to increase their usage of gearing over the next 12 months. 4 of current users intend to increase their use of margin lending in the next 12 months. The interest level is even higher among new users (those who started using margin lending in the last 12 months) and returning users (who had stopped using margin lending in the past, but returned to it again within the last 12 months). 6 of new users and 60% of returning users intend to increase their use of margin lending in 2015. New and returning margin lending investors are more likely to be planning to increase the use of margin lending over the next 12 months Q24 Do you intend to increase or decrease your level of margin loan borrowings over the next 12 months? By New vs. returning vs. continuing investors Among current margin lending investors Net*: 61% 43% 2 29% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 27% 47% 23% 42% 19% 18% Started using ML within last year [n=108] 10% 12% 12% Returned to ML within last year [n=52] *Net: % willing to increase - % willing to decrease. 39% 33% 3 10% 11% Continuing ML users [n=1005] Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 38% All current ML users [n=1165] Decrease substantially Decrease slightly Maintain Increase slightly Increase substantially 9 2015 Investment Trends 11

Rationale behind intended increase Investors increasingly say low borrowing levels, confidence in market outlook and current low interest rate environment are the reasons for their intention to increase the use of margin lending While half (52%) of current margin lending users say they see good buying opportunities, investors increasingly think they should borrow more as their assets increase in value. The top 3 increasingly cited reasons in 2014 are: My current borrowing levels are low 41% (up 7% pts from 2013) I'm confident about the market outlook 37% (up pts) I'll borrow while interest rates are still low 22% (up pts) Users planning to borrow more increasingly cited capital gain, market outlook and low interest rate among the reasons for doing so Q24 Do you intend to increase or decrease your level of margin loan borrowings over the next 12 months? Increase substantially, 11% Good buying opportunities Q25 Why do you say that you intend to increase your level of margin borrowing? Among investors who currently have a margin loan 0% 10% 20% 30% 40% 50% 60% 70% I'll borrow more as my inv. increase in value Increase slightly, 3 My current borrowing levels are low I'm confident about the market outlook I'll borrow while interest rates are still low Assets are still undervalued Maintain, 38% I'm getting back into the market The recovery is under way Decrease slightly, 12% Decrease substantially, Industry average [n=1503] Markets have stabilised I intend to buy property Other 2012 [n=356] 2013 [n=475] 2014 [n=722] Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 10 2015 Investment Trends 12

Number of margin calls Compared to 2013, fewer current margin lending investors received a margin call Amidst improved market performance at the time of the survey, the proportion of current margin lending investors who received a margin call over the previous 12 months was the lowest observed since 2008. 93% of margin lending investors did not receive any margin call over the last 12 months to September 2014 (up from 89% in 2013). The average number of margin calls (among those who received a margin call within the prior 12 months) increased slightly to 2.4 (from 2.3 in 2013). The proportion of current investors who received a margin call over the last year is the lowest observed since 2008 Q72 How many margin calls have you received in the last 12 months? Among investors who currently have a margin loan Average*: 3.3 2.6 2.0 2.3 2.3 2.3 2.4 100% None 90% 80% One 70% 60% 50% 53% 6 79% 7 81% 89% 93% Two Three 40% 12% Four 30% 11% 12% 7% Five 20% 12% 11% 11% 9% 10% 8% 3% More than five 10% 3% 3% 3% 0% 3% 2008 [n=459] 2009 [n=924] 2010 [n=1170] 2011 [n=1378] 2012 [n=934] 2013 [n=1147] 2014 [n=1518] *Among those who received any margin call. Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 16 2015 Investment Trends 13

Margin call resolution Three quarters of margin call recipients resolved their margin calls by adding cash In 2014, investors were much more likely to resolve their margin loans by adding cash. 7 of margin call recipients say they added cash to the portfolio (up from 63% in 2013), while 28% say they sold assets (down from 40%). 11% of margin call recipients both added cash and sold assets to resolve their margin calls in 2014. Three fourths (7) of margin lending investors who received a margin call resolved it by adding cash Q76 How did you handle this [most recent] margin call? (Multiple responses permitted) Among current investors who received a margin call within last 12 months 2013 [n=115] 2014 [n=101] 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% I added cash I sold assets The margin lender sold assets to cover the loan I took no action and stock prices recovered I added managed funds as security Sold assets Added cash I added more assets as security 17% 11% 6 I paid out the margin loan Other Copyright Pty Limited. Investment & Borrowing Survey: Highlighted findings. Reproduction strictly prohibited. 18 2015 Investment Trends 14

About Investment Trends Investment Trends is a specialist research organisation which provides new business insights and decision support information to many leading financial services organisations. We combine analytical rigour and strategic thinking with the most advanced market research and statistical techniques to help our clients gain competitive advantage. Investment Trends is headed by Mark Johnston. Mark has been a leading industry analyst in the brokerage, CFD, FX and wealth management industry since 1999. Investment Trends is an Australian company which has grown into a global research organisation servicing clients in Australia, Asia, Europe and the USA. Our work is focused on helping clients answer three fundamental questions: 1. How does the market currently work? 2. How is the market evolving? 3. How do I improve business outcomes: Acquire more customers Retain more existing customers Increase revenue per customer Prioritise technology and process investments Investment Trends clients include many of the leading banks, investment platform providers, online brokers, FX and CFD providers, as well as major industry regulators. 2015 Investment Trends 15

Investment Trends Reports Investment Trends produces annual syndicated reports on a range of financial services markets. Our reports cover self-managed super funds, planner technology, alternative investments, investor needs, margin lending, planners, direct equities and trading behaviour, among other topics. Self Managed Super Funds Superannuation Retirement Investor Report (Aus) Accountant Report (Aus) Planner Report (Aus) Member Sentiment and Comm s Report (Aus) Member Engagement Report (Aus) Retirement Income Report (Aus) Retirement Planner Report (Aus) Investor Needs Product Margin Lending High Net Worth Investor Report (Aus) Investor Product Needs Report (Aus) Limited Advice/ Intra Fund Advice Report (Aus) CFD, FX, Online Broking Reports (see next page) Capital Protected Products Report (Aus) Exchange Traded Funds Report (UK & Aus) Investor Report (Aus) Broker Report (Aus) Planner Report (Aus) Planner/ Adviser Technology Other Planner Customised Research Planner Technology Report (UK & Aus) Platform Report (Aus) Planning Software Report (Aus) Planner Business Model Report (UK & Aus) Adviser Product & Marketing Needs Report (Aus) Planner Direct Equities & SMA Report (Aus) Planner Risk Report (Aus) Custom research projects (via focus groups, 1-2-1 interviews, online surveys) Client Experience Optimisation (Satisfaction trackers) Institutional research Online Broking Leveraged retail trading products Australia Bi-annual 1 st Half 2 nd Half 2 separate reports CFD FX Singapore Includes remisier CFD & FX UK CFD, FX & Financial Spread Betting Germany CFD & FX France CFD & FX US FX Hong Kong Global Covering Australia, France, Germany, Singapore, UK & US FX & Warrants Covering Australia, France, Germany, Singapore, UK & US 2015 Investment Trends 16

Investment Trends Pty Ltd ABN: 141 074 856 56 ACN: 107 485 656 Suite 2102, Goldfields House 1 Alfred Street SYDNEY NSW 2000 Australia Phone: +61 (0) 2 8248 8000 Fax: +61 (0) 2 8248 8088 E: sales@investmenttrends.com.au www.investmenttrends.com.au Copyright 2015 Investment Trends Pty Limited. All rights reserved. The material in this study ( Investment and Borrowing Survey: Highlighted findings ) contains proprietary information including copyright material and trademarks, the rights to which must be respected. Investment Trends owns the copyright in the design, selection, arrangement, production, and presentation of the Report, as well as in the material originally developed by or for Investment Trends. You may use copyright material for your personal or internal use within your business. Otherwise, and except as permitted by law, no copying, publication, modification or commercial exploitation of the Report is permitted without the prior written permission of the owner. Except for any rights under any legislation in Australia or any other relevant jurisdiction which cannot be excluded or limited, Investment Trends does not provide a warranty with the Report or give an assurance as to its accuracy or reliability. Investment Trends shall not be liable for any damages you suffer, or which are claimed against you by a third party, arising out of use of the Report. 2015 Investment Trends 17